Peltz Keeps Pressure on PepsiCo for Split

Calls on beverage, snacks company to defend Power of One strategy

March 14, 2014

NEW YORK -- In the latest volley of letters and responses, Nelson Peltz's Trian Fund Management LP, which own approximately $1.3 billion of PepsiCo Inc. shares, has sent a letter to PepsiCo's board of directors calling on it to provide shareholders with analytical support for PepsiCo's continued reliance on the integrated "Power of One" strategy and its rejection of Trian's recommendation to separate global snacks and beverages into two independent public companies.

Peltz has been pushing for the split since at least 2011, when Trian took a 2.36-million-share stake in PepsiCo. He has said that he "is concerned by PepsiCo's continuing underperformance since 2006, which Trian believes is due primarily to PepsiCo's misguided reliance on the 'Power of One' strategy. … Trian believes standalone snacks and beverage companies, positioned correctly in the market, would unlock value at PepsiCo."

Also, Peltz joined the board of Mondelez International earlier this year, and was urging the Deerfield, Ill.-based candy company to consider a merger with a spun-off PepsiCo snack business if such a split were to occur.

PepsiCo has refused Peltz's overtures repeatedly, saying in a letter, "The board has been closely involved in evaluating the arguments that you presented …. We have carefully studied [our own] extensive analysis of the current company structure and its beverage business and management's conclusions that much of Trian's data is selective and, in many instances, misused. Our board and management team are confident in the thoroughness of this analysis and in the conclusion that PepsiCo's value is maximized as an integrated food and beverage company. We trust that you appreciate the seriousness with which we have examined your observations and proposal and the firmness with which we reject the proposal to separate the businesses. In short, the board and management have concluded that the financial engineering you propose erodes value for shareholders rather than creates value."

Peltz's latest response:

"We were extremely disappointed by Mr. Cook's Feb. 27 response to our white paper. The dismissive tone of his letter suggests that you do not appreciate the degree to which PepsiCo's shareholders, the owners of the company, are frustrated. Given the company's prolonged underperformance, we believe the board and management are obligated to provide shareholders substance and analytics--not just platitudes and rhetoric--to defend the alleged benefits of the 'Power of One.'

"We call on you to back up your assertion that 'much of Trian's data is selective and, in many instances, misused.' …. Our white paper is based on more than a year of exhaustive due diligence as well as decades of experience in the beverage industry as a former supplier and competitor. Our sources include publicly available information filed by the company, industry data and conversations with analysts, industry participants, customers, other knowledgeable sources and competitors from around the world. Among the sources we spoke with are some of the most respected people in the consumer products industry. We stand by our work product and insist that you furnish shareholders with information and transparency addressing … Trian data."

"PepsiCo has a strong, independent board of directors that is committed to the highest standards of corporate governance and transparency. Under our corporate governance guidelines major shareholders may consult with our presiding director at any time. In fact, our independent presiding director and one other independent board member have already met with Trian without management present. The board has thoroughly reviewed Trian's proposals and has concluded that they would not maximize shareholder value. The board of directors is confident in the thoroughness of management's analysis and leadership, and in the conclusion that sustained value creation for PepsiCo's shareholders is best optimized as an integrated food and beverage company. Our board and management continues to be open to engagement with shareholders."

Founded in 2005 by Peltz, Peter May and Ed Garden, New York City-based Trian seeks to invest in "high-quality but undervalued and underperforming public companies and to work constructively with the management and boards of those companies to significantly enhance shareholder value for all shareholders through a combination of improved operational execution, strategic redirection, more efficient capital allocation and increased focus."

Purchase, N.Y.-based PepsiCo is a global food and beverage leader with net revenues of more than $65 billion and a product portfolio that includes 22 brands that generate more than $1 billion each in annual retail sales. Its main businesses are Quaker, Tropicana, Gatorade, Frito-Lay and Pepsi-Cola.

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